The Edge Economic Forum Valuations outpacing earnings a concern

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The Edge Economic Forum Valuations outpacing earnings a concern
Business & Markets 2014
Written by Levina Lim of theedgemalaysia.com
Monday, 10 March 2014 09:55

KUALA LUMPUR: The global economy is largely recovering along with an improving US economy, but this stronger macro picture may not necessarily translate into a stronger stock market for Malaysia.

“It depends on how successfully Malaysia reforms itself and its level of commitment to the transformation agenda,” said Tong Kooi Ong, chairman of The Edge Media Group, in his presentation at The Edge Economic Forum last Saturday. He added that it will be a painful process.

Tong said Malaysian stock prices, which are largely driven by high valuations outpacing earnings, render a more cautious outlook necessary. “This cautious outlook for the stock market is further compounded by the fact that coming valuations — whether you take in price-earnings or price-to-book ratios — are not cheap.

“The outlook for earnings in 2014 and 2015 I believe will be less than exciting, as earnings for banks, property and plantation companies will likely peak in 2014,” he said.

According to Tong, populist policies had also contributed to greater government debt and a narrowing current account surplus that threatens Malaysia’s credit rating.

“Keeping Malaysian interest rates down will simply translate into a weaker ringgit, which will on its own drive out global capital,” he said, adding that interest rates must necessarily rise despite the fact that both the government and households are deeply in debt.

Tong cautioned that a major selldown in Malaysian government securities, foreigners hold about 45% of the total bonds, will affect the ringgit and interest rates, sending the stock market lower.

“A foreign selldown may not necessarily be brought about by foreigners alone as Malaysians are also owners of government debt via institutional funds like the Employees Provident Fund. We should not forget that capital outflows are not always by foreigners. If Malaysians decide to lose faith, no amount of institutional spending will keep back the tide,” he said.

On the property market in Iskandar Malaysia, Tong said there is still no certainty as to whether the growth will be sustainable in the longer term, but that the actual take-up rate may be slow. He was responding to a question from the floor.

He pointed out that while the original plan for Iskandar revolved around residential properties and offices, not much attention was paid to industrial activities. He said it is imperative to have a well conceived plan to expand industry further north of Iskandar, especially if it would like to attract more Singaporeans.

“It depends on the infrastructure and security, as well as whether there will be Singapore-syllabus schools for their children,” he said.


This article first appeared in The Edge Financial Daily, on March 10, 2014.